House GOP Unveils New Homeowner Subsidy Policy

The House GOP has unveiled a a new housing plan. Among the provisions are these:

1. A $5,000 tax credit for people who refinance their homes. This is designed to help people who are in trouble making their monthly mortgage payments.

2. A $15,000 credit for homebuyers who put more than 5 percent down. This gives homebuyers an incentive to put some skin in the game when they purchase a home.

3. Extends the real estate capital gains tax exemption not just to primary residences, but to investment properties as well. “If you invest in your neighborhood,” said Rep. Kevin Brady, “then we’ll invest in you.”

Writing in the Corner, Jerry Taylor slams this proposal.

[H]ow about this — an end to federal subsidies for home ownership. Market actors have overinvested in housing. The macroeconomy will not recover until that money is transferred out of housing and into other, more productive economic sectors. Plans to retard that necessary shift in investment will slow economic recovery and produce a less efficient economy as a consequence.

I know that there is plenty of political capital to be gained by providing handouts to middle-class homeowners and little political capital in removing the same. But a political party that ostensibly stands for free markets and limited government should not be in the business of underwriting or subsidizing private investments in anything unless we can find some plausible market failure in need of correction (and perhaps not even then).

Matthew Yglesias concurs with Taylor:

Preferential subsidies for investment in housing lead people to, on average, consume more housing and less stuff-that-isn’t-housing than they otherwise would. In other words, bigger houses instead of fancier clothes. This, in turn, has a substantial negative impact on the economy. Larger houses cost more to heat and cool, and larger houses lead to longer commutes. We shouldn’t stop people from buying big houses if that’s what they want to do, but it’s quite harmful to be specifically encouraging them to invest their resources in this way quite independently from the financial crisis.

You’ll get no debate from me on this. I’d also add, for myself, that homeownership, especially for younger people at the start of their careers, can actively be a bad thing. Not only are we encouraging people to spend too much on housing when they could be spending it on other things, but that rootedness of homeownership limits people’s flexibility in adjusting to more localized economic downturns. If you’re renting, and times are tough, you can make a deal with your landlord or just move into a place with cheaper rent when your lease is up. If you find a new job in a different city, it’s a lot easier to handle a couple of months of lease payments or to find someone to sublet than it is to try to sell a house at the same time you’re starting out in a new job in a new community. Owning a house can actively be an economic burden for people, especially in times of economic distress like we’re seeing now.

I have no problem with homeownership. If someone wants to buy a house, more power to them. But I fail to see why we need to subsidize that choice.

(cross-posted to Heretical Ideas)

FILED UNDER: Economics and Business, US Politics, , , , , ,
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.


  1. PD Shaw says:

    Item #3 surprised me the most. We’re subsidizing flippers?

  2. duckspeaker says:

    A related article in this week’s Economist argued the same thing, offering statistics that linked increased homeownership with higher unemployment. The reason: as workers sink larger investments in their home, it limits mobility (especially now when many loans are upside-down), and thereby reduces the pools of both jobs available to the average person and people available for the average job.

  3. Phil Smith says:

    Here’s an interesting history of the interest deduction. Used to be that all interest was deductible – because at the time that part of the code was introduced, there was virtually zero private debt. It was intended as a business deduction. TEFRA 86 eliminated consumer interest deductions – except for mortgages.

  4. steve says:

    Agreed. The home mortgage interest rate deduction should go. It has too many negative economic consequences. However, which party will get rid of it? Neither IMO. Taking anything away from the middle class is political suicide.


  5. PD Shaw says:

    Perhaps we can start with baby steps and end the deduction for home equity loans.

  6. Raoul says:

    Truer words have never been stated: “Not only are we encouraging people to spend too much on housing when they could be spending it on other things, but that rootedness of homeownership limits people’s flexibility in adjusting to more localized economic downturns.” I repeat it because it really needs to be emphasized to new young home buyers. Ironically, at least in the DC area, it is a pretty good time to buy. As to the interest deduction- the way you do it is to get rid is through a multi-prong approach- 1) adjust downwards the deduction 2) reduce income taxes proportionally 3) make it happen through a five year process.

  7. Steve Plunk says:

    Spending on fancy clothes is better than spending on a home? I fail to see the logic in that one.

    Let’s look again at the benefits of home ownership. Historically it has been the best way to increase wealth for the middle class. It represents a wealth pool that can be accessed through equity loans for a variety of uses. Home owners are better neighbors leading to better communities leading to better places to live. Owning a home gives the owner intangible benefits like a sense of place, higher feelings of security, and the rewards of being responsible for something.

    Home ownership may lead to higher unemployment by making workers less mobile but that creates a more stable atmosphere for raising children. Homeowners are more likely to be involved with PTA’s and other community organization.

    So there are things on the plus side as well as the minus side. From my point of view the benefits outweigh the costs and the mortgage deduction reflects society’s acknowledgment of those benefits and it’s desire to increase home ownership.

  8. PD Shaw says:

    Steve Plunk,

    I think the primary beneficiaries of the deduction are not middle class. Look at the statistics from the article Phil Smith linked to:

    More than 70 percent of tax filers don’t get any benefit from the deduction at all. O.K., many of them are renters. But even among homeowners, only about half claim the deduction. And for the 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest — just under $2,000 per return. (Figure it like this: the median home, as computed by the Bureau of the Census in 2003, is valued at $140,000. If you finance 80 percent of it with a 6 percent mortgage, your interest bill is $6,720 a year. A taxpayer in the 25 percent bracket would save one quarter, or $1,680.)

    Note: something like 13% of people don’t file, so clearly a large group of people in the median income range do not benefit from this deduction.

  9. Raoul says:

    Steve and PD: we may add the fact that other countries without the subsidy (e.g. Canada) have the same rate of ownership. As to the so called advantages- yes, they exist, but so do the disadvantages. When it comes to government policy, it easier to take without acknowledging the adverse effects.

  10. Bill H says:

    When I first entered the workforce, owning a home was something that one aspired to. You worked your way toward that goal, and gained it by becoming established as an accomplished adult; one who could, among other things, save up enough money for the down payment.

    When my nephew graduated from college at age 19, still a bachelor, he bought a 3-bedroom, 2-bath, 2000 sqft home as a matter of course. It simply never occurred to him not to do so.

  11. DC Loser says:

    In my 20 years of home ownsership I’ve often wondered about the supposed benefit of this choice. Granted, the tax deduction was an inducement, but it was more than offset by the annual maintenance costs (lawn care, gardening supplies, paint, replacing AC and furnace, etc…) Not being independently wealthy enough to have other people do that for me, I was basically tied to my house on the weekends instead of going out with my wife and enjoying other things. Frankly, the best time I can recall we had together was when we lived in an apartment without all the maintenance headaches.

  12. Dave Schuler says:

    The mortgage interest deduction isn’t the only subsidy on home ownership but one of several. The capital gains rules governing sales of primary residences changed in 1997 and again in 2008. Although the revision reduces the incentives for speculation put in place in 1997, home ownership remains a method of accumulating wealth.

    Federal subsidies for road-building also constitute a subsidy to real estate developers and, consequently, home purchasers.

    A good place to start in reforming the mortgage interest deduction would be by capping it. A cap of, say, $20,000 on deductible interest would probably pass.

  13. Wow, it’s amazing how quickly the GOP fell off the smaller government wagon again.

  14. odograph says:

    I think they fell off the free market wagon too there Stormy.

  15. They need a ‘statists anonymous’ for GOP congress critters to join. “Hello, my name is John Boehner and it’s been three days since I last tried to expand the government in order to buy votes.”

  16. Just for posterity, please note that many of the Obama critics here are just as disgusted with these Republican proposals as the Obama cheerleaders are.

  17. Drew says:

    I haven’t had a mortgage in over 10 years. But I’m think’n. $5K credit?

    Can you say unintended consequences.